In 1958, a New Zealand born economist named William Phillips noted an odd relationship between inflation and unemployment. The “Phillips Curve” was born!
For years, it was believed that the way to lower unemployment was to increase inflation, and the way to decrease inflation was to increase unemployment. This “inverse relationship” was hailed as an intellectual breakout . . . until the stagflation of the 1980’s. Since then, the Phillips Curve has been viewed as a better indicator of short-term inflation than long-term inflation.
The latest “jobs” report this morning was another strong report, with 339 thousand jobs created last month even though only 190 thousand new jobs were expected. This is consistent with last week’s “JOLTs Report” which found over ten million open, unfilled jobs. Normally, this would suggest a high probability that the Fed would increase interest rates at their meeting this month.
However, I hope they will not! Monetary policy operates with a monetary lag. An interest rate increase today doesn’t slow the economy tomorrow. That usually takes 6-12 months before the impact is clear. A strong “jobs” report today doesn’t mean runaway inflation tomorrow. It takes a while!
With nine straight months of interest rate increases, we don’t know how much impact nine consecutive rate increases have already had. We don’t want the Fed to slow the economy too much . . . especially if done accidentally!
It is time to STOP raising interest rates . . . at least for a while!!